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Death and Debt - What Happens When the Bankruptcy Filer Passes Away?

Submitted by Rachel R on Wed, 07/31/2013 - 10:32pm

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They say nothing is certain in life but death and taxes. When it comes to bankruptcy though, that’s even more of a certainty and one that even death doesn’t cancel out. If you have a family member involved in a chapter 7 or a chapter 13 bankruptcy and they pass away, you may be wondering what happens to their debt, estate and other assets and how it can affect those left behind.

“Death or incompetency of the debtor shall not abate a liquidation case under chapter 7 of the Code… If a reorganization is pending under… chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be included in the same manner, so far as possible, as though the death… had not occurred.”

In 1983, an advisory committee issued a note that said a chapter 13 case will likely be dismissed. Okay, so what does that opinion plus the rule of law mean? It means that bankruptcy can carry on after death in an unfortunate legacy that can affect inheritance for survivors and keep the estate tied up!

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Death and Chapter 7

If a debtor is involved in a chapter 7 bankruptcy and they die, the case continues on as if they were still alive. The rationale is that because assets are sold off to vanquish the debt, this can be done just as easily if the debtor is dead. If the deceased had just begun the bankruptcy process, survivors may have to step in to help complete the process.

For instance, the Section 341 Meeting of the Creditor requires the debtor to appear, but they obviously cannot if they’ve passed on. Someone who knows the deceased debtor’s financial circumstances can step in to answer questions from the Trustee about the financial circumstances of the debtor that has passed on. Usually the surviving spouse or representative of the estate steps up to give information.

Death and Chapter 13

The differences between chapter 7 and chapter 13 are that the latter requires a monthly payment to fulfill the debts. With the debtor deceased, this is not possible since they will no longer be working and generating an income. The judge has a couple of different options to handle the case after the debtor passes on.

The judge can dismiss the chapter 13 or the estate could make installment payments or pay a lump sum to address the debts. The best outcome would be if the court granted the deceased debtor a hardship discharge and fully discharge all of the debts with no further payments. It’s up to the judge’s discretion which way they rule, although the debt situation and estate circumstances will factor in.

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Why Is Discharge the Best Scenario?

If there are assets left by the debtor that are part of their estate, creditors may apply for payment from the estate. If, however, the debts are discharged, whatever is left in the estate can go to the survivors (family members or other people specified in the will) without having to extinguish debts first. For more information about filing bankruptcy in North Carolina, contact the law offices of John T. Orcutt for advice and assistance. Call now for a free consultation on your debt!